There is currently a lot of speculation about the outcome of the Greek elections of 17 June. Although each of the two parties most likely to win—the left-wing Syriza (SYRIZA) or the centre-right New Democracy (ND)—wish Greece to remain in the euro, such an outcome seems unlikely. The British Finance Minister, George Osborne, has hinted strongly at Greece’s exit; various EU and German sources have made similar noises.
Meanwhile, the leader of Syriza (SYRIZA), Mr Tsipras, has made it clear that if elected he would reject the austerity conditions imposed by the troika. Mr Samaras of ND may not have said he would do quite the same, but given his initial opposition to austerity plus the country’s bleak outlook because of the ‘bailout’, if he wins the election he may ultimately be forced to do so.
Mr Tsipras has the virtue of being honest, and largely untainted by the scandalous historical behaviour of the Greek political class in protecting oligarchic interests, but he appears to believe that Germany so fears the contagion a Greek departure would cause that its bluff can be called. Such a bet is probably mistaken, as one of the present authors has argued elsewhere. Not only has the ECB already changed the terms of its weekly refinancing operations to Greece, but given the current turmoil in Spain and Italy, it seems likely that Ms Merkel will accept ‘banking union’ only as a quid pro quo for her ‘austerity pact’, a pact which is no longer politically viable in Greece. After all, Greece accounts for less than 3% of combined Eurozone (EZ) GDP and is hardly a major German export market.
The cost to Greece of remaining in the euro under the current bailout conditions is very high. By the end of this year, its GDP will have fallen by 20% since 2009. Unemployment overall is now more than 20% while for young people the rate is nearly 50%. Greece has already surpassed the 12 consecutive quarters of negative growth experienced by the USA in the late 1920s and early 1930s. Amongst others, Nouriel Roubini has argued that if Greece keeps to these conditions, not only will its economy suffer even greater damage but its debt/GDP ratio is unlikely to fall below 120% until 2020.
What are the alternatives? They are: (a) to accede to a creditor-driven default; or (b) to go for a a debtor-driven default. A possible (but improbable) third option is a U-turn by the ‘troika’ followed by a drive for growth. The latter could be financed by the emission of new jointly-backed Eurobonds.
Greece is not new to default. It has been in default for more than half of the time since the 1830s when it gained independence from the Ottoman Empire; Greece defaulted on its loans in 1826, 1843, 1860, 1893 and in 1932.
According to an RMF (SOAS) report, a debtor-driven default in 2012 would be preferable to bailout and austerity. The RMF argues that:
- default should be debtor-led;
- the banks should be nationalised (without compensation);
- departure from the Euro would need to be accompanied by capital controls, administrative control of some products (rationing especially of oil), redistribution and a new industrial policy;
- RMF assumes a default of 50% on its debt;
- it admits that the adjustment in the short run would be difficult; and that wages would need to be indexed ;
- taxes should be raised, especially on the ship-owners, the Greek Orthodox Church and the banks;
- RMF suggest that Greek’s debt should be looked at by an Independent Audit Commission. This raises the issue of ‘odious’ debt (eg, in December 2008, President Correa declared Ecuador’s debt odious and had got it reduced).
For an argument in favour of leaving the Euro, see Larry Elliott who suggests that a useful model is Argentina which defaulted in 2002 and had growth of 9% a year between 2003 and 2007—although he concedes that Argentina was a big commodity producer and devalued when the world economy was booming. An argument against is Vicky Price (same Guardian issue, 13 May 2012) who says that Greece would lose out but so would the rest of the Eurozone – the contagion effect would be considerable.
An example of ‘successful’ depreciation of the currency is Iceland. With the default, there would have to be and probably would be changes to the political structure. Patronage in Greece has been widespread and Greece is reckoned to be the second most corrupt country in the EU after Bulgaria, with high levels of tax evasion.
With default, the new currency (new drachma) would depreciate by as much as 60% very quickly. Greek labour productivity in 2009 was 98% of the EU average but productivity per hour was 74% (the Greek labour force works the longest hours of all EU countries). Used for investment, the gains from productivity growth would encourage some domestic industries; eg, industry (12% of GDP) and services (85% of GDP). The latter presumably includes tourism (19.3 million tourists in 2009, accounting for 18% of GDP).
Greeks are particularly sensitive to the argument often heard in northern Europe—particularly in Germany— that citizens of ‘Club Med’ countries are not ‘proper’ Europeans but slackers who must now shoulder blame for their own predicament. Many Greeks (and others) would object that Germany has forgotten its own history, and in particular, the destruction wrought on countries such as Greece by German occupation during the Second World War. A particularly sensitive question is that of the non-payment by Germany of reparations.
Germany occupied Greece from 1941 to 1944. In 1945, the Paris Conference on Reparations was held at which Greece laid claim to $10 billion – about half the claim of the Soviet Union. Greece was awarded $25 million (note million not billion) – the USA opposed heavy penalties on Germany, bearing in mind the effects of reparations on the Weimar Republic and the rise of Hitler after the First World War. In 1953 the London Agreement put off reparation payments until a peace treaty was signed. In 1990 the Peace Treaty was signed but it didn’t require reparation payments.
Greece remains the only country to which Germany failed to pay reparations. Greek politicians claim that €70 billion is outstanding but another source puts the current value of the enforced occupation loan as $164 billion with additional war reparations owing of $332 billion, a total of $506 billion; yet another source puts the sum at €575 billion (about $720 billion). It is worth noting that the latter figure ($720 billion) is greater than Greece’s current sovereign debt. In 2012 the International Court of Justice ruled that Germany is exempt from being sued in overseas courts by Greek victims of atrocities during the Second Wold War.
How does the above affect the argument that although the vast majority of Greeks favour staying in the euro, they may find themselves ejected, particularly if Mr Tsipras is elected. Ironically, Greece will almost certainly be told that by electing a government which fails to stick to the austerity imposed by the troika, they ‘deserve’ their fate. Although it may be the case that Greece will recover its economic position outside the euro, ordinary Greeks will not soon forget the humiliation of being dictated to by Germany and her political allies, especially given the still sensitive issue of reparations.
However one assesses the risk of costly financial contagion which would follow a ‘grexit’, the political costs will doubtless greatly complicate the task of ‘political and fiscal integration’ by the rest of the EZ sought by Ms Merkel.
 Greece was occupied by Germany from 1941. In the winter of 1941/42, 100,000 Greeks died of starvation and a majority of Greek Jews were deported to concentration camps -. And yet more Greeks were killed in the civil war between 1945 and 1949 – in which the communists were defeated partly due to opposition by the UK and USA – Stalin and Churchill had agreed that Greece would be part of the west and that Stalin would get Bulgaria, Romania and Hungary - Greece was ruled by the military from 1967 to 1974 but from then on until 2012 by the centre-left PASOK and the centre-right New Democracy -. 2012 has seen the rise of SYRIZA (a coalition of the left) and Chrysi Avgi (Golden Dawn, a party of the extreme right). The latter favours the deportations of migrants – the latter make up 10% of the population – that is 1.1 million of whom 400,000 are undocumented -
 Greece exports about 182,000 barrels of oil per day but imports about 500,000. -.
 Tax evasion is high – the Tax Justice Network claiming that £20 billion is held in Swiss Banks by Greeks.